In March 2010, crain’s new york business.com reported that after being found in violation of wage and hour labor laws, Ollie’s Noodle Shop & Grille filed for Chapter 11 bankruptcy protection. The restaurant chain filed bankruptcy under the corporate entity of 1160 Third Avenue Food Service Inc. At the time of filing, Ollie’s had three Manhattan locations, and listed assets of $563,000 and liabilities over $3.7 million. Ollie’s has two restaurants on the Upper West Side and one in Times Square. The company had a third Upper West Side location at West 84th Street, but that restaurant closed. Ollie’s planned to keep its three noodle locations open, despite the bankruptcy filing.
For the small business owner who owes a lot of money but can’t pay, creditors may threaten legal action against the small business owner personally. How much creditors collect, and how creditors can collect, depends on how a small business owner organizes the business, whether the owner personally guarantees debt repayments, and whether a business owner files bankruptcy.
When financial debts threaten business survival, evaluate potential personal liability to decide whether to file bankruptcy. Get advice from a small business attorney with bankruptcy experience before filing bankruptcy. Bankruptcy stays on a credit report for up to ten years, and can make it hard for a small business owner to open another business. An experienced bankruptcy attorney can advise on the bankruptcy process and pre-bankruptcy planning.
The extent of a small business owner’s personal liability depends on how the owner structures the business and whether the owner personally guarantees or secures debts. A business does not need to file bankruptcy to go out of business. If it liquidates assets and cease operations on its own, it may get more money for its assets than a trustee in a bankruptcy. However, if a business liquidates on its own without filing bankruptcy, creditors may recover claims from the assets of the business, and if there are no assets, the creditors can file collections lawsuits against the business or the owner personally.
Ollie’s is an example of a business organized as a corporation. If a business owner organizes a business as a corporation, the owner becomes a shareholder of the business. A shareholder’s personal assets are usually protected from business creditors. However, sloppy record paperwork puts personal assets at stake for business debts when assets belonging to the business intertwine with personal assets. For instance, making food deliveries with a personal car, paying personal bills from business bank accounts, or making business decisions not recorded in minutes may lead to a court disregarding a corporate entity and pierce the corporate veil by holding the owner liable for corporate obligations where: (a) the shareholder treats the corporation as an alter ego, ignores corporate formalities, or (b) the corporation is inadequately capitalized.
A small business owner contemplating bankruptcy should engage an experienced bankruptcy attorney to advise on the bankruptcy process and pre-bankruptcy planning.